Simple Risk Management Rules for Crypto Traders

Traders without trading plans and a discipline become investors. Learn how to stay in the game.

crypto trading risk management rules

Psychology is among the key factors that lead to trading mistakes.

To minimize its effect and to make cold-blooded decisions in turbulent markets, emotional discipline, trading plans, and risk management rules are critical. Not to mention the fact that all these make trading less stressful and more profitable experience.


Follow these basic rules on how to manage your trades and how to make the most of them.

Rule #1: Set a Trading Plan

A trading plan is like a map that guides traders and helps them to move ahead. It’s a set of rules with clear goals, a plan of action and conditions under which trades should be executed.

The idea of these rules is to help traders remain disciplined, avoid hasty decisions and lower the chances of potential mistakes.

Do not forget that different personalities have different trading styles, timeframes, risk tolerance, and thus their trading plans vary according to individual specifics. Nevertheless, the proper trading plan always remains realistic, measurable and includes the following elements:

  • The position size
  • The goal of the trade, that determines when it’s time to take profits and sell
  • The level of risk tolerance

Rule #2: Determine the Position Size

Inexperienced traders lose the largest amounts when they have big, open positions and place no stop-loss orders.


Position sizing is very important for trading success. Furthermore, it is one of the most influential factors that determines the returns of your whole crypto portfolio.

There are certain methods, however, how to calculate proper position size and enter the market with a minimal risk.

One of the common ways to determine the size of the trade, is to use the fixed percentage of your whole trading portfolio. This might be up to 1% of the portfolio, meaning that if you have $5,000 in your crypto account, the trade should be no bigger than $50.

Typically, as the size of your portfolio grows, traders mostly tend to risk a smaller percentage of their account on each trade.

Another method to set the position size is by using a fixed amount of fiat currency for each trade. In this case, it is recommended to only place the amount you would be comfortable to lose if markets take a turn for the worse.

Finally, if you want to open positions with maximum safety, it is always worth following a simple rule: place the biggest order at the beginning of the new trend and gradually lower the additional entry amounts in the later phases of the same trend.

Rule #3: Set Take-Profit targets

Trading is all about making money. You buy cheaper and sell higher than the entry price. Making the benefit from the price rise and selling assets at the right time is called taking profit.

The trick is not to miss the price highs and sell assets before their value declines again; not too soon, not too late, but at the right time to secure profits.

Whenever you buy a certain crypto, ask yourself the extent to which you expect the price to rally higher. When will it be enough for you? At what point will you sell assets?

It is critical to set goals for each trade. Typically traders use various indicators to see how far the price might go up. They set profit targets according to such data and sell assets right when the price reaches a certain level.

How do I Set a Target for Profit-Taking

In general, the best time to take profit is when the trend starts to show exhaustion. You may use indicators like Moving Average (MA), RSI, volume, or candlestick to identify the upcoming trend reversal.

However, the targets will differ depending on what type of trader you are. Day traders will typically close their positions the same day. They won’t hold them open overnight, so their targets will be completely different from swing traders’ targets who speculate on longer time frames.

Taking profit levels also depend on the strategies that you are using. You may set Fibonacci lines up from the recent price lows to the recent highs, which gives the extension levels and a hint of how far the price could go further before facing resistance.

You may also follow support and resistance levels to set your profit-taking targets. If you bought digital assets on the support level, then you could sell them at the resistance level and secure some easy profit. This profit-taking strategy is commonly used in the in stock market, or when the price moves clearly between the support and resistance price ranges.

Finally, you may follow the moving averages (MA) to set the exit from the market. MA is one of the most often used indicators for placing buy or sell orders.

MA tracks an asset’s price over a time period and gives you an idea of the trend direction. It can also serve as a signal of where to take profit and sell your coins. If the price is under the MA, rises accordingly, and bounces back, it may indicate a sell moment.

Related video: Trading for Beginners – Fibonacci levels

Related video: Trading for Beginners – How to trade with a Moving Average?

Rule #4: Use Stop-Loss

Prices can move very fast, especially in volatile markets such as crypto. To avoid unexpected falls and dramatic consequences experienced traders always use stop-loss orders.

Stop-loss orders allow you to react to the market changes immediately and save big positions from becoming big losses. It is one of the most important and basic risk management tools in cryptocurrency trading.

Speaking simply, stop-loss is the price level at which you agree to take a loss and sell your digital assets until their value hasn’t declined even further.

Cutting losses while they are relatively small prevents overly optimistic expectations that falling prices will soon reverse, although they only keep diving deeper.

How do I Set a Stop-Loss Order?

It’s on you to decide how much you can afford to lose with each trade. This might be 5% or 7% or even 10% of your initial amount invested into specific crypto. The percentage here only depends on how risk-tolerant you are as a trader.

However, do not forget that stop-loss and position size go hand in hand. If you increase the position, tighten the stop-loss, and if you increase the stop-loss level, it’s best to lower the amount of assets in an open position.

If you’ve bought a certain asset gradually and at a range of prices it could be best to set the stop-loss below the average price of all the orders to minimize the risk.

A common joke among traders is that those who don’t use stop-losses become investors. There’s so much truth in it. If you don’t want to learn this the hard way, make stop-loss your everyday tool and control your cryptocurrency trades.

Why You Should Care?

Well defined rules and trading discipline brings structure and stability to a trader’s life. Clearly set goals and proper risk management rules keep trades under control and help to increase the returns. Not to mention the fact, they save from volatile market conditions, hasty decisions, and emotional purchases that rarely end well.

This article is for information purposes only and should not be considered trading or investment advice. Nothing herein shall be construed as financial, legal, or tax advice. Trading forex, cryptocurrencies, and CFDs pose a considerable risk of loss.

Simona Ram

Simona Ram is a senior journalist at DailyCoin, who covers the forces and people shaping the Web3 industry and the areas where decentralized crypto assets meet the centralized world. She has experience in business communication within the financial sphere and has a degree in Foreign Languages, which helps her interact effectively with sources from diverse backgrounds. In her free time, Simona enjoys exploring new cultures.